Mortgage Applications Fall Again, Is The Spring Bounce Over?

U.S. mortgage applications fell for a third consecutive week, with demand for home purchase loans falling to its lowest since November 2003 despite a drop in interest rates, an industry trade group said on Wednesday.

The Mortgage Bankers Association said its seasonally adjusted index of mortgage application activity for the week ended April 21 fell 3.7 percent to 548.6, its lowest level this year. It was 569.6 in the previous week.

Some new readers might be wondering why we care about mortgage applications..

It’s simple really. While the existing and new home sales data are very interesting, they are lagging indicators. They tell us what happened in the past.

In order to attempt a glimpse into the future, we need to find an indicator that correlates to future sales activity. Unfortunately, there is no crystal ball, it’s just not that simple. However, we’ll certainly take what we’ve got, and that is, purchase applications and refinance applications.

Joe Sixpack needs to apply for a mortgage before he buys a house. The MBA purchase index attempts to put a number on the purchase application activity. Now, it should be obvious that not every application results in a sale, and there is an equal chance that the survey doesn’t capture all the activity. It’s not perfect, but it’s better than nothing.

So with purchase applications falling to levels not seen since 2003, it’s readily unlikely that we’re going to see sales return to 2005 levels in the near future. Decreasing purchase apps point to a decrease in demand.

But what about refinance applications you ask? Well, I like to keep an eye on refinance applications as a leading indicator of consumer spending. The correlation isn’t as clear cut as purchase applications, and I’m sure many will argue that I’m really reaching here. But with cash-out refinancing at never-before-seen levels, I believe much of the boom in consumer spending has been due to “cashing out” equity. So why do we care? A drop in housing prices is bad, a drop in housing prices along with a drop in consumer spending would be terrible.

BEIJING, April 25 — An expert Monday warned that official figures are seriously underestimating the amount of property currently lying empty in China.

According to a first quarter report released by the National Bureau of Statistics on Saturday, 123 million square metres of space in new buildings was unused at the end of March, a rise of about 24 per cent year-on-year.

In the residential sector, 69.8 million square metres of housing is lying empty, an increase of approximately 20 per cent.

A standard two-bedroom apartment is about 100 square metres in size, so this means there are almost 700,000 apartments unoccupied.

“Our statistics only include the amount of property that has not yet been sold or rented,” a bureau spokesman said yesterday.

However, according to Yin Zhongli, a real estate expert with the Chinese Academy of Social Sciences, if the space purchased by speculators but not yet sold on was factored in, the figure might be far higher.

Speculation in the real estate sector is quite common in China, Yin said. “Last year’s figures in Shanghai showed that up to half of the new housing sold was not used.”

But he could not give exact figures in terms of real vacancy rates, saying it was a hard to get an accurate number.

Yin warned a high housing vacancy rate might disturb the market order and trigger a financial crisis.

Different statistics have shown that the amount of vacant space in residential buildings has been on the rise in recent years, even as ordinary consumers complain they can hardly afford to buy a decent apartment.

In Beijing, for instance, there was 13.7 million square metres of vacant space in residential buildings in 2005, up by 32 per cent from a year earlier.

However, a report released by Beijing Normal University’s Finance Research Centre earlier this month said that at least 70 per cent of urbanities could not afford to purchase new apartments.

The report said that buildings with vacant space were mainly in the country’s coastal areas, leading property insiders to warn that supply and demand were unbalanced.

The National Statistics Bureau’s report stated that, in the first three months this year, investment in apartments aimed at low and medium-income families rose by less than 3 per cent in contrast to the overall 23 per cent growth rate.

The total investment in the property sector reached 279.3 billion yuan (US$35 billion) in the first quarter, up 20 per cent over the same period last year.

Statistics also showed a 4 per cent drop in foreign investment in China’s property sector in the first three months of the year, down to 5.2 billion yuan (US$650 million), while the total investment in the same period increased by about 25 per cent, reaching 564 billion yuan (US$70.5 billion).

I think this is a reasonable target price over the longer-term, but not for next year. It also may not be achieved through price reductions alone, but a combination of price reductions and the economy catching-up with housing prices (inflation). If you look at the last (late 80’s) NY metro area bubble, housing prices dropped by about 10%. With inflation factored in, it was closer 30%; taking almost 9 years (inflation adjusted) to hit the bottom from about 1989 – 1997. It could be quicker this time due to risky mortgages and rising interest rates. Last time around most buyers still put 20% down, the use of I/O loans was minimal and falling interest rates in the 1990’s meant no “payment shock”.

Just don’t underestimate sellers. They are not going down without a fight. Many believe it’s their God-given right to get 10% more than their neighbor did last summer. Many simply won’t be able to sell because they can’t afford to bring a check to the closing. This is going to be a long drawn out struggle.

I believe that they certainly can and will. According to people I have spoken to the last downturn was very swift. The peak for housing was at least in my area, the summer of 2005. By this time next year we are two years into the decline since the peak.The bottom in Bergen Co real estate was 1993/94, with the decline staring in 1989/90. There were many bargains in 1991 I have access to old MLS books and the difference from 89 to 91 in prices was amazing.

I also believe that the toxic loans this time around, and all the speculators will lead to a much swifter decline. Throw in the property revals that many north Jersey towns have gone through, and it becomes even more compelling. There are also many seniors in many north Jersey towns, who will be retiring etc and or moving due to high property taxes. Throw in jobs transfers,and divorce, and all of lifes other things, and you will see declines.

Keep in mind prices in 2002/2003, were very very high, people in their wildest imagination never thought they would get the prices they were getting then (myself included). So I believe many people will not have a problem accepting those prices next year, assuming they have or want to move, and that they are not over leveraged.Some wil also be savvy eneough to take themoney and run,a s prices could continue to decline.

Prices were slowing down in the summer of 2003, what re-inflated the bubble was the suicide loans etc.

I believe we will see a swift decline back to at least 2003 prices, just knock off the appreciation for 2004/2005. I think we will start to see this in late summer of this year.

Could prices drop even more? possible, but if you can buy at 2003 prices, with a fixed rate and a nice down payment, I would do it. I do not believe you have to wait for the absolute bottom.

Those new home sales numbers are beyond silly… the disconnect between this government survey and the existing home sales survey and reality is simply amazing… i also find it to be amazing how most of publicly traded new home builders are reporting sales numbers to be down in the range of 5%-25%… and they continue to guide downward… and homebuilders confidence has dropped to levels not seen since 2001.. simply amazing, indeed.

Any thoughts on which major banks, not mortgage companies, have the most exposure on mortgages?

It seems the really big banks (Citi, JPMorganChase, etc.) are going to have moderate hiccups from the coming residential real estate mess, but what about the next tier down. Who looks the most vulnerable?

I wouldn’t call it a conundrum since the 13% increase in March 2006 was compared to the dismal results of Feb 2006. Sales in March 2006 were down 7% versus March 2005. I love the way our media spins and or leaves our important facts. Have you noticed how the comparisons switched from YoY to MoM? Interesting.

we are in peak selling season right now. suburban single family home sellers have about 2 months to get their act together. after June, it becomes a struggle to close, move, etc before the school year starts. true lowball season begins in July/Aug

Any thoughts on which major banks, not mortgage companies, have the most exposure on mortgages?

It seems the really big banks (Citi, JPMorganChase, etc.) are going to have moderate hiccups from the coming residential real estate mess, but what about the next tier down. Who looks the most vulnerable?

JM

10:42 AM

sorry – I was out today

Don’t worry about i-banks and global banks [JPMC & CITI].

I haven’t looked at this stuff for awhile, but I seem to recall WaMu being the poster child for getting it’s tuchus kicked when this turns.

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